We provide a
comprehensive study of the liquidity of spot foreign exchange (FX) rates
over more than two decades and a large cross-section of currencies.
First, we show that FX liquidity can be accurately measured with daily
and readily-available data. Second, we demonstrate that FX liquidity
declines with funding constraints and global risk, supporting
theoretical models relating funding and market liquidity. In these
distressed circumstances, liquidity tends to evaporate more for
developed and riskier currencies. Finally, we show stronger comovements
of FX liquidities in distressed markets, especially when funding is
constrained, volatility is high, and FX speculators incur losses.